Bank of America revised its near-term gold price outlook after the Federal Reserve's shifting monetary policy stance created obstacles for the precious metal. In January, the bank predicted gold would reach $6,000 per ounce by spring, but the metals research team led by Michael Widmer now says that target "looks unlikely for now" due to market expectations of Fed rate hikes. Despite the revised short-term forecast, BofA maintains that long-term structural factors including high U.S. fiscal deficits, reduced foreign Treasury holdings, and central bank diversification away from the dollar will continue to support gold prices over time.
BofA Revises Near-Term Gold Outlook
Bank of America's metals research team acknowledged the significant correction in gold prices over recent months and adjusted its short-term expectations. "Hitting our $6,000/oz target looks unlikely for now. But the ongoing U.S. macro combination of high deficits, lack of fiscal consolidation and resulting funding needs --- the premise behind our original bullish gold call --- suggests there is still fuel in the tank for gold to rally again over the longer term," the bank stated in its latest precious metals report.
Michael Widmer explained that shifting expectations around U.S. monetary policy remain the biggest obstacle for gold in the near term. At the start of the year, markets expected the U.S. central bank to cut rates, but the war in Iran created a global energy crisis that led to a dramatic increase in inflation pressures. Markets have started to aggressively price in rate hikes before the end of the year.
Federal Reserve Rate Hike Expectations Pressure Gold
According to the CME FedWatch Tool, markets see a more than 70% chance of a rate hike by September. "The increased probability of rate hikes into December 2026 has been closely correlated with a decline in gold prices. Or, put a different way, the shift from 'inflationary cuts' to tighter monetary policy reduces gold upside by around 50%, all else being equal," Widmer said.
BofA noted that even if a lasting peace deal is negotiated, inflation pressures are unlikely to ease. "In a world of greater geopolitical fragmentation, this is unlikely to subside anytime soon. Amid higher global supply chain pressures and rising producer prices, the outlook for inflation is not particularly encouraging. In addition, services inflation was persistently above target in the past, but negative goods inflation helped achieve the Fed's price stability target. However, core goods inflation spiked after Covid, and after coming down, Trump tariffs delivered another blow. Meanwhile, housing disinflation helped keep a lid on core inflation, but that support is likely to fade following its reversal," the analysts said.
Structural Factors Support Long-Term Gold Rally
While elevated inflation will force the Federal Reserve to maintain a hawkish monetary policy stance, BofA identified structural issues supporting higher gold prices. "U.S. economic policy remains unorthodox. Indeed, the fiscal deficit continues to run at around 6% of GDP, while foreign holdings of U.S. Treasuries have declined. According to the latest central bank gold survey, the majority of respondents (74%) expect moderate or significantly lower U.S. dollar holdings within global reserves over the next five years," the analysts said.
"Until that backdrop changes, we believe there is still some fuel left in the tank to push gold higher again, despite the near-term headwinds," the bank stated.
Retail Investment Demand Potential
Widmer's team sees further potential demand from retail investors. The bank acknowledged that gold needs the market to price out rate hikes again, and if that happens, investment demand could drive further upside. The analysts noted that physical and paper gold investments now account for around 5.5% of total equity and fixed-income markets.
"Hence, there is still room for investors in the shift from a 60:40 to a 60:20:20 portfolio," the analysts said.
FAQ
What did Bank of America say about its $6,000 gold price target?
Bank of America's metals research team stated that hitting the $6,000 per ounce target "looks unlikely for now" due to the Federal Reserve's tightening bias and market expectations of rate hikes. The bank originally predicted gold would reach $6,000 by spring in January.
Why did Bank of America revise its near-term gold forecast?
BofA revised its forecast because shifting expectations around U.S. monetary policy created obstacles for gold. Markets moved from expecting rate cuts at the start of the year to aggressively pricing in rate hikes before the end of the year, driven by inflation pressures from the war in Iran and the resulting global energy crisis.
What percentage chance do markets assign to a Fed rate hike by September?
According to the CME FedWatch Tool, markets see a more than 70% chance of a rate hike by September.
